As the Federal Government rushes out its amendments to the taxation of employee share schemes, it has copped criticism for its original moves from an unlikely source. The left-of-centre Per Capita Group (which is bankrolled by dot.com millionaire and former Victorian Labor politician Evan Thornley and whose board includes Tom Bentley, a senior Julia Gillard adviser, and Josh Bornstein from lawyers Maurice Blackburn) has produced a paper on “Employee Share Ownership and the Progressive Economic Agenda“.
Per Capita is a think-tank whose website states that it is “a non-profit company with the bare essentials for overheads (come visit and see!), so all your donations go into producing the ideas to make Australia a better place.” The website later claims that its “research is rigorous, evidence based, and long-term in its outlook, considering the national challenges of the next decade rather than the next election cycle.”
But it seems the research conducted for its Employee Share Ownership paper was not overly rigorous.
Stating the underlying rationale for its views, Per Capital refers to alleged statistical evidence outlining the benefits of share schemes, such as a Vince Fitzgerald study in 1993, which claimed that “companies operating ESO plans enjoyed sales per employee 12% greater than the industry median.” Per Capita neglected to mention that the Fitzgerald study was commissioned by the Remuneration Planning Corporation, a company whose principle mission is to design, implement Employee Share Plans for Australia’s major companies (as opposed to Fitzgerald’s influential and respected report to the Treasurer on national savings, also written in 1993).
Per Capita also noted a 2004 Report by Econtech for the Employee Ownership Group claiming employee share schemes boosted Australian productivity by between $240 million and $480 million annually. Econtech is part of KPMG, an accounting firm which benefits by providing advice to large companies on employee share schemes, while the Employee Ownership Group was formed (rather unsurprisingly), to promote employee share schemes.
After concluding that share schemes really are a good thing, Per Capita notes that “ESO plans illuminate the value of superior skills and experience and provide clear incentives for workers to accumulate further skills and experience.” Given that most public companies appear far less efficient that partnerships or private firms, the rhetoric seems shallow. In reality, workers love ESSs because they provide a neat tax break of a few hundred dollars per year — hardly likely to enhance “skills and experience”. Firms who implement share schemes benefit because they are able to have staffing costs partly covered by taxpayers through concessional taxation of such schemes.
Per Capita later attempted to address criticisms of share schemes, claiming that “ESO schemes are if anything, less risky than other ordinary equity because employees have better information about the outlook for the company and a greater ability to influence its performance.” Employees of Babcock & Brown, Enron, Centro, Macquarie Bank or ABC Learning Centres would disagree. In fact, not only do lower level employees have virtually no influence of the overall business of their employer, but having a significant amount of wealth locked up in an employer is inherently stupid from a wealth management perspective. Should their employer fail, not only does the employee lose income and possibly entitlements, but also a large amount of their savings.
The report also incorrectly outlined the existing tax implications of share schemes, alleging that if employees elect to defer tax, they are “essentially taxed at double the normal CGT rate.” This is not correct. After exercise, so long as the underlying shares are held for a year, the CGT discount is available. Per Capita then undertakes a bizarre comparison of Australian, UK and US taxation treatment of share schemes, noting that “the Australian tax-exempt scheme returns 5.8% to employees, only slightly higher than the 5.4% received by the benchmark Australian investor outside an ESO scheme.” Per Capita ignored the obvious point — why should employee share schemes (which apply to only a limited class of workers, namely, those employed by listed, public companies) have their tax payments subsidised by other taxpayers at all?
Per Capita even suggests extending the rort by raising the tax-free amount of employee shares to $5000.
If share ownership was the panacea it’s claimed to be, public companies could still compulsorily devote a portion of their employees’ after-tax income to acquiring shares. This would equally “align” workers with shareholders and still provide the alleged “productivity boost” claimed. The only problem with such a system is that those employees should be required to pay tax on the shares at their marginal rate of income, just like workers at small businesses, not-for-profit organisations or private firms need to pay tax on all their income — rather than at a discounted CGT rate or deferred for ten years.
For a think-tank, it doesn’t seem that Per Capita does much in the way of deep thought.